The Oil Squeeze of '79

Huge jumps in costs are the latest peril of the petro-pinch

Has the U.S. learned anything from its energy agonies? Apparently not. Five years after the Arab embargo gripped the nation in petroleum paralysis, the economy remains as vulnerable as ever to upheavals in faraway lands. All winter long the turmoil in Iran has brought chilling reminders of that fact, and last week came some of the scariest yet. It was hard to tell which were more frightening: signs that oil prices were about ready to leap again, or Washington's seeming impotence and inaction.

Indeed the Administration was savoring a rare bit of encouraging news from Iran. After four months of revolution that cut its export production from 5.5 million barrels a day to zero, the country's 27,000 drillers, engineers, technicians and other oil workers began returning to their jobs. In the fields of Marun and Ahwax Asmari, in the refineries of Abadan, and at the pumping center of Ahvaz, precious petroleum is beginning to flow anew as the industry struggles to resume limited export production.

So much for the good news. Even as the supply shortage begins to look somewhat less menacing, the familiar and appalling threat is looming of yet another price rampage by the other members of the 13-nation OPEC cartel. Now as in 1973-74, the danger is that rocketing fuel prices will aggravate inflation, force governments to fight back by clamping down on domestic growth, and for the second time in a decade plunge the world economy into an oil-greased slide.

Those prospects came closer to reality last week as a result of abrupt and startlingly large price increases announced by two OPEC members that the U.S. has come to count on for moderation, Venezuela and Kuwait.

In Caracas, Valentin Hernandez, Minister of Energy and Mines, summoned apprehensive oil company executives to his office and bluntly told them that Venezuela intended to lift prices an average 14% on all its oil exports. Later, the government announced that it would increase only the cost of heavy fuel oil, which accounts for much of the country's exports. Oilmen now expect that the broader crude oil increases will be formally posted later this month when existing three-month contracts are about to expire. For the U.S., which relies heavily on Venezuelan imports, the increases already announced could add from 3-c- to 6-c- to the cost of residual fuel oil used to generate electricity. Heating costs for factories, schools and other public buildings will rise.

In Kuwait, Oil Minister Sheik Ali Khalifa al-Sabah declared a price increase of 9.3%, retroactive to Feb. 20. He blamed the decision on what he called price profiteering by oil companies, implying that if Big Oil was somehow ripping off the public, Kuwait was going to get in on that game too.

The harshest setback came from Iran itself. No sooner had Hassan Nazih, the new head of the National Iranian Oil Co., announced that NIOC would resume exports, than he was telling cheering oil field workers that Iran would be raising prices by as much as 50%, to $18 to $20 a barrel. At the same time, said Nazih, the Country would cease dealing with the London-based oil consortium', headed by British Petroleum, that has exclusive long-term contracts to buy NIOC exports.

World supplies are short enough that Iran expects no trouble finding buyers, particularly from countries that have little if any oil of their own and seem willing to pay any price for supplies. As Nazih was speaking, a tanker was reportedly loading 300,000 tons of crude at Iran's Kharg Island for Japan at the new, extortionate price. The easy sale could well tempt other producing nations to post similar price increases in the days ahead.

Since oil sales are priced in dollars, strong-currency countries like Japan and West Germany can afford to pay the high costs. The declining value of the dollar has made oil relatively cheaper in yen or marks than it was only a few years ago. If other OPEC countries now decide to follow Iran's lead, even going so far as to break existing contracts with oil companies, the dollar price of a barrel of crude could surge to unimagined heights.

In theory, one solution would be a consumer boycott of oil purchases from any OPEC member that failed to honor its contract commitments. But no serious moves have been made in that direction. Instead, at week's end, Ashland Oil Co. disclosed that it too had grabbed up a load of Iranian crude, and at a price that the company would only describe as "somewhat higher" than prevailing OPEC charges.

About the most that consuming governments have so far been able to manage by way of concerted action was a voluntary conservation agreement worked out last week during a two-day conference of the 20-nation International Energy Agency in Paris. The nations agreed to cut overall oil consumption by 5%, but because the U.S. uses so much, it pledged to reduce imports by 11%, or 1 million bbl. a day. The U.S. Department of Energy announced that it would meet that goal by relaxing controls on gasoline so that the retail price, which now averages some 70-c- for regular, will rise about 5-c- during the year, thereby discouraging consumption.

Gas prices will go much higher than that if OPEC's prices also keep climbing. The run-up has already sparked fears that the entire cartel, which only last December announced a general 1979 increase of 14.5%, will soon declare yet another boost in order to keep from breaking up in a mad scramble after ever higher prices. As if to sanctify the money grab, OPEC headquarters in Vienna announced that individual price adjustments by members were perfectly all right "in light of their prevailing circumstances."

Much of what the cartel does now will depend on Saudi Arabia, whose share of OPEC oil production has soared from 26% to 34% since the Iranian cutback. The Saudis have long been regarded as the principal force for price restraint in the cartel, but statements from Riyadh last week were discouraging. After calling for urgent OPEC consultations, the Saudi government merely promised that it would not raise prices until after the end of March. Oilmen read that as a plan to boost in early April.

The cartel members are jabbing up prices because the panicky rush for supplies by oil companies on the small but highly volatile "spot market" shows that they can get away with it. Normally most petroleum is bought by oil companies under long-term contracts with OPEC suppliers, but 3% to 5% changes hands for whatever price a seller can get. In times of scarcity, demand surges--and so do prices.

When prices move high enough, the temptation grows for even oil companies to start speculating, sometimes by selling portions of their own oil through profiteering middlemen. Last week the Saudi oil minister, Sheik Ahmed Zaki Yamani, complained of just that tactic, and the sentiment was echoed in Caracas by Venezuelan officials. OPEC might be wise to stay silent because much of the oil that is churning through the spot market is coming not from the companies but directly from the producing states.

Far too much is at stake for the world to tolerate for long the problem of rising prices from erratic suppliers. As one top oil executive put it in London: "The game is too big to be taken advantage of in this way. The economic penalty of imposing sudden price increases is lethal."

Unless prices level off, living standards for people in consuming nations will be damaged. Worst hit will be the developing countries. Their impoverished peoples could not pay for OPEC'S latest blast of increases; fresh jumps could bankrupt their governments.

OPEC would also suffer. The oil producers are paid in dollars for their exports, and since 1973 they have accumulated some $60 billion in greenbacks that are on deposit with commercial banks, principally in the London-based Eurodollar market. Billions more are invested in Treasury bills, stocks, and real estate throughout the U.S. The whole international monetary system, which has been the basis of postwar growth and prosperity, could be plunged into crisis if the banking system is swamped by a deluge of dollars.

Whatever happens next, the U.S. economy will be hurt by what has already happened. The Morgan Guaranty Trust Co. estimates that oil prices in the U.S. will increase at least 15% by year's end. That would lead at a minimum to a halfpoint jump in consumer prices because oil is used not only for fuel but also as a raw material in chemicals, synthetic fibers and many other products. Rising fuel charges also will prod workers to demand more pay, which businessmen will pass on in higher prices. And as more dollars flow abroad, the greenback's value will tend to slump against other currencies, and Americans will wind up paying more for imports. The impact on the U.S. trade deficit, which last year reached a record $28.5 billion, will also be severe. In January alone, the deficit hit an eleven-month high of $3.1 billion, largely because oilmen rushed to stock up and beat future price increases.

The latest energy shocks make a recession in 1979 more likely than ever. The downturn may also come sooner than originally thought, a possibility reinforced by another Government report: the index of leading economic indicators fell by a sharp 1.2% in January, the third consecutive monthly decline.

The consequences of the energy crunch for individual companies will depend on how much they need oil. For example, nearly all of Du Pont's 1,700 products, from paint to tires, use oil as an ingredient. Says the chief executive of a major chemical manufacturer: "If anything, we have underestimated the inflationary effects of the oil price rises."

Yet some companies may benefit. Short-haul airlines expect to win new passengers because rising gasoline prices make it cheaper to fly than to drive. But long-haul lines may have to cut service to small cities. T.W.A. last week scrubbed five flights out of Kansas City for lack of fuel. The auto industry stands to benefit because rising gasoline prices are likely to move shoppers to buy fuel-efficient cars. That will help automakers meet strict federally mandated "fleet average" mileage standards for vehicle sales. On the other hand, fast-food chains, restaurants and hotels will suffer if Americans drive less overall and gasoline stations are closed on weekends to conserve fuel.

The overriding question is what Washington will do about the price squeeze. Though he proclaimed the energy crisis the "moral equivalent of war," President Carter has behaved as if it were the acronym MEOW. Now his generals are quarreling publicly over strategy. Observes John Sawhill, who was the federal energy chief under Richard Nixon: "The U.S. could not have been less prepared for this shortage. What bothers me is to see members of Carter's own Cabinet go on TV and make veiled threats about military action in the Middle East even though we refuse to take the simple action at home that can reduce our dependence on foreign supplies."

Atonishingly, the Carter Administration could not even seem to agree on whether the week's worries added up to anything worth fretting about at all. In an unseemly intramural squabble, Department of Energy officials kept pressing the White House to make a strong statement on the need to conserve oil supplies, while Treasury aides urged that the President say nothing for fear of spooking currency dealers abroad into dumping dollars. Yet it seemed more likely that a determined U.S. policy to conserve would strengthen the dollar by showing the world that the nation was taking steps to correct its trade deficit.

Carter simply sent to Congress a weak program of standby fuel-saving measures that included a ban on Sunday gasoline sales, a requirement to turn down thermostats in public buildings and restrictions on illuminated outdoor advertising. Whatever limited value the package may have had was undercut when the President told a press conference: "We don't have any present intention of implementing any of those measures."

All this waffling is immensely frustrating for Energy Secretary James Schlesinger. For the past two years he has urged conservation steps; Congressmen have done little more than nod politely. The present squeeze, Schlesinger argues, "is a warning, but the real danger is in the long run. We must take advantage of short-term crises to try to make fundamental long-term changes."

The Administration needs to act quickly to create confidence by demonstrating that it has a strong policy to develop and conserve energy. Its pledge to let gasoline prices rise somewhat to discourage consumption is welcome, but long overdue. What is more, even at $1 a gallon, gasoline in the U.S. still would be much cheaper than in almost all other industrial nations. Controls on gasoline prices do not simply need to be relaxed; they need to be eliminated altogether. Only when gasoline becomes too precious to waste will people stop wasting it.

For all its flaws, Carter's 1977 national energy plan contained a sensible idea: letting the price of domestically drilled crude oil, which is now fixed legislatively by a complex system of price controls and formulas, rise to world levels. Carter hoped to accomplish this through the so-called crude oil equalization tax. A portion of the resulting revenues would have been returned to poor families to ease the burdens of rising fuel costs, but the rest could have been spent on the development of alternative energy sources such as nuclear power and coal gasification. Oil companies argued that COET's revenues ought to have been given directly to them, and in the resulting congressional struggle the tax was dropped from the watered-down bill that eventually became law last autumn. The idea should now be brought back.

Most important, the Administration needs to stop sounding schizoid about energy. Until that happens, people will simply doubt that Washington knows what it is talking about. Even under the best of circumstances, the energy debate can be frightfully confusing. Last week, for example, newspaper headlines reported that a Library of Congress study had found the current oil shortage in the U.S. to be "minuscule." The study, commissioned by Representative Albert Gore of Tennessee, showed the shortfall to be a mere 80,000 bbl. daily, less than a sixth of the 500,000 bbl. per day that the Department of Energy has said the economy needs but is not getting. Both sets of figures are technically correct; they simply use different projections of the growth of demand this year. In any case, the size of the shortage is less important than the fact that a shortage exists. Even a loss of only 80,000 bbl. per day is enough to send prices climbing.

The plain fact is that prices are shooting out of sight because the worldwide clamor for crude is deafening. As ever, the biggest voice belongs to the U.S. Unable to do much more than make plaintive bleats about the need to conserve, the White House is now seeing its energy nightmares begin to come true. Cuts in consumption and the rapid development of energy resources like coal, natural gas and nuclear fuels--all of which the U.S. has in abundance--are the easiest and, in fact, the only ways to prevent the twin demons of scarce supplies and rising prices from endlessly plaguing the nation. In five years, two energy crises ought to have hammered that message home by now.

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